What’s the best way to pay for a new car? Cash, finance or lease? PCP or PCH?

Having a new car is expensive whether you buy with cash, a loan or you lease.

What is the best way to drive a brand new car? Should you buy it outright or should you lease it?

The simple answer: compare the total cost between buying and leasing, over a set period of time. Total up the number of lease payments, plus any upfront charges, plus other expenses vs the total of loan payments or cash price paid and other expenses over the same period, less the anticipated resale price.

However, the full answer to this question depends entirely on your personal circumstances: your financial situation, your family car requirements, and your priorities. It also depends on a “deal” you can get. There’s no clear-cut rule as to which option is best, as there are benefits and drawbacks to both leasing and buying. There is no single one size fits all answer to this question. Sometimes there is more to leasing vs buying than money.

Furthermore, comparing various car deals isn’t easy as there are many variables: cars are fast depreciating assets, they come in many different configurations, they have varying running costs, plus they also require ongoing maintenance, road tax, and insurance. And when buying a car you can only estimate how much you are likely to sell it for in the future – you won’t know the final price until you actually sell it.

A lot depends on what you want a car for, if it is literally a task to spend as little as possible to get you and your family from A to B, or whether you need a comfortable and safe family car with the most space, with the right options, with the latest gadgets, and with excellent reliability and long warranty.

There are three main options:

– purchasing outright

– personal contract purchase (PCP)

– personal contract hire (PCH)

Buying car outright

Buying a car outright for cash is undoubtedly the cheapest way to own a new car if you are planning to own it for a few years. Given that cars depreciate rather than appreciate, it makes more financial sense to buy them without paying any interest on top of the purchase price.

When you buy a car outright you own it from day one, there is no annual mileage limit, you can keep it or sell it whenever you like, and you get some cash when you sell it as there is always some equity in it, following depreciation over time.

For most people, one of the biggest costs of driving a car is depreciation: the reduction in the value of a car over time. Depreciation is the difference between a car’s value when you buy it and when you come to sell it. Wear and tear aside, the biggest depreciation occurs within the first 12 months of owning a new car. There are two reasons for this:

part of the purchase price of a new car includes VAT and road tax. So when you purchase a new car that money is gone instantly.

you pay a retail price for a new car: whatever amount the dealer is willing to agree to in order to sell you the car. Once you drive the car off the dealer’s lot the car is instantly down to its wholesale price. Wholesale price is whatever amount the dealer would be willing to pay you for the car to buy it back.

Depreciation can amount to thousands of pounds each year, so paying cash makes the most sense when buying a relatively inexpensive vehicle as overall you lose less money, and when you’re planning to keep the car for a few years.

The same rules apply when financing an outright purchase of a brand new car, except for you need to pay interest on top of the purchase price. Therefore it makes the purchase more expensive, and this is when you should also consider leasing the new car instead of purchasing it.

The notion that “buying is better than leasing” is based on paying off a car in 3 to 5 years, then keeping the car for many years (10 years or more). It might well be the best option to minimize your financial outlay on cars, but not everyone wants to do this. If you want to drive a new car every 2 to 3 years, maybe a lease car is better.

Personal Contract Purchase (PCP)

PCP finance is something in between purchasing the car outright and leasing it. It’s perfectly suitable if you like to change your vehicle regularly, but prefer not to commit to buying it from day one. Firstly you choose the deposit you’d like to pay and your term, usually between 24 to 48 months.

At the end of the term, you can part-exchange your vehicle for a new one (using any equity in the car as deposit), or pay the final payment to either keep your vehicle or return it as a final settlement.

Personal Contract Hire (PCH)

Leasing a car is far more comparable to purchasing a service such as internet access or gym membership. It’s a car subscription: for a fixed term and a fixed amount each month you are given the use of a brand new car. For many people this makes a lot of sense and as long as you budget carefully this arrangement works very well. With PCP you trade a constant monthly payment in exchange for a new car every two or three years.

Car lease makes perfect sense if you like to have the newest car, but in a purely investment sense leasing is the worst option – leasing offers the lowest monthly payments, but over many years it is the most expensive option to drive a new car.

A lease is literally you paying for the depreciation of the vehicle, amongst other things. Leasing is another way of buying a car on credit, and the only major difference for a consumer is that leasing gives you predictable depreciation, while financing or buying for cash does not.

PCH is all about a fixed cost for a nice new car, with no surprises: pay your monthly fee, and when the term ends, just get a new one with all the latest gadgets and full warranty. No hassles.

To get you started, to see what family car lease deals can be had please visit Ling’s Cars.